Secular Stagnation on the Supply Side: U.S. Productivity Growth in the Short and Long Run Robert J. Gordon Northwestern University and NBER Bank of Canada and European Central Bank, Conference on the Underwhelming Global Post-Crisis Growth Performance Ottawa, June 8, 2015
Secular Stagnation: Applies Not Just to US but Canada, EU-15, Japan Secular Stagnation: slow growth not no growth Most of my talk is about the U.S. But almost everything here applies to Canada and the EU-15 At the end: charts comparing Canada, the U.S., and the EU-15 for output per hour, output per capita, and hours per capita
Secular Stagnation 1938 and 2015 As the Mirror Image Sources emanate from supply side: Hansen in 1938: slowing population growth and end of territorial expansion the whole new outfit of capital formerly needed by the added population is now no longer needed Today 2015: slowing potential GDP growth Potential Output per Hour Potential Hours of Work Working-age Population Falling Labor-force Participation Rate (LFPR) reduces Hours per capita Actual real GDP growth: 1974-2004 3.12, 2004-14 1.55 the whole new outfit of capital formerly needed by the added population is now no longer needed Mirror-image Interpretation, Hansen 1938 vs. U.S. now
Chains of Causation AS Effects directly reduce output per capita growth: Declining LFPR Declining productivity growth For any given rate of output per capita growth Slower population growth reduces potential GDP growth Implies Lower Net Investment Basic idea: long-run steady state with fixed capitaloutput ratio Slower output growth means slower growth in capital to maintain fixed capital-output ratio Lower net investment: reduces aggregate demand and feeds back to lower productivity growth
Employment-Population Ratio and GDP Gap, 1919-1941
Decline in Population Growth As Seen From 1938 and 2015
Why Hansen Wasn t Worried About Productivity Growth
Preview: Primary Source of Secular Stagnation is Slowing Productivity Growth Since Solow 1957: The history of TFP growth is the best guide to the importance of innovation The best organizing principle to think about innovation is to distinguish among the industrial revolutions (IR #1, IR #2, IR #3). IR #2 was without compare in its impact in creating rapid TFP growth for a full half century IR #3 has changed our lives but has raised TFP growth less, for only a decade instead of a halfcentury.
To Understand TFP History, We Need Definitions of the Three IR s The 1 st IR occurred 1770-1840, continued impact through 1900 Steam engine, railroad, steamships, wood=>steel The 2 nd IR occurred 1870-1920, continued impact through 1970 along at least 6 dimensions Electricity, light, elevators, machines, air conditioning Internal combustion engine, vehicles, air transport EICT: Telephone, phonograph, movies, radio, TV Running water, sewer pipes, and the conquest of infant mortality Chemicals, plastics, antibiotics, modern medicine Utter change in working conditions, job & home
Third Industrial Revolution Since 1960 the EICT Revolution (one dimension compared to the six dimensions of IR #2) Everything on this list has already happened; to continue TFP growth of 1970-2014 there must be a steady stream of innovations that are of similar importance Entertainment: TV color, cable, time shifting, HDTV, streaming Information Tech mainframes, minis, PCs, web browsers, e- commerce Communications: mobile phones, smart phones Productivity enhancers: ATM, bar-code scanning, lightning-fast credit card authorization Search tools provide free information, both public and proprietary inside the firm
The Standard of Living Is Not the Same as Productivity Growth Total Output or GDP (Y). Total Hours of Work (H). Total Population (N). The Output Identity Y/N Ξ Y/H * H/N
Real GDP Per Capita Is Not the Same As TFP And Does Not Measure Innovation
Per-capita Real GDP Growth Now Is Below Pessimistic Trend
Per-Capita Income Growth Does Not Equal Productivity Growth
The Same History, Just for Productivity (Y/H) Growth
Growth in Labor Productivity Over Three Eras
The Effect of Education and Capital Deepening
The Second Industrial Revolution vs. the Third Industrial Revolution
The Powerful But Delayed Effect of IR #2 on TFP Growth
IR #2 Created Big Green TFP; IR #3 Created Little Green TFP
IR #3 Has Failed the TFP Test Failure #1: TFP growth post-1970 barely 1/3 of 1920-70 Failure #2: IR #3 boosted TFP growth only briefly 1996-2004 Brynjolfsson and McAfee: We re at a point of inflection of accelerating productivity growth My response: Could the productivity benefits of IR #3 be almost over?
The IR #3 Changed Business Practices Completely 1970-2005 Transformation in offices completed by 2005. 1970 mechanical calculators, repetitive retyping, file cards, filing cabinets 1970s and 1980s. Memory typewriters, electronic calculators, PCs with word processing and spreadsheets. E-mail. 1990s. T-1 lines, in-house software. The web, search engines, e-commerce 2000-05 flat screens, revolution in business practices was over Transformation in retailing completed by 2005 1980s and 1990s Wal-Mart led big box revolution with innovations in supply chain and inventory management Check-out revolution: bar-code scanners, credit/debit card authorization technology
More Achievements Finance and Banking Completed by 2005 1970s and 1980s, ATM machines 1980s and 1990s. Transition from multi-million share trading days to multi-billion share days How Long Ago Were the Creations: Amazon 1994, Google 1998, Wiki and i-tunes 2001, Facebook 2004, iphone 2007
Summary: Stasis Everywhere You Look Offices use desktop computers and proprietary information as they did 10-15 years ago The Northwestern econ department staff, 1998 vs. 2015 Retail stasis. Shelves stocked by humans, meat sliced at service counters, checkout bar-code scanning. Maybe card authorization a bit faster Medicine: electronic medical records largely rolled out, little or no change in what nurses and doctors do Higher Education: cost inflation comes from rising ratio of administrative staff to instructional staff
Stasis in Consumer Electronics NYT on Consumer Electronics Show, January 2014 This show was a far cry from the shows of old... Over the years it has been the place to spot some real innovations (VCR 1970, CD 1981, HDTV 1998) This year s crop of products seemed a bit underwhelming by comparison Editor of gadget website: This industry that employs all of these engineers... Needs you to throw out your old stuff and buy new stuff even if that new stuff is only slightly upgraded.
Additional Evidence of Diminishing Returns Decline in Business Dynamism Decline over last 30 years in creation of new firms In recent years more exiting firms than entering firms Decline in labor market Fluidity Decline in job and worker reallocation rates
Business Dynamism Represented by New Firm Entry
Stagnation Symptom #2: Declining Rate of Net Investment
Stagnation Symptom #3: Growth in Manufacturing Capacity
Stagnation Symptom # 4: The Most Dynamic Part of Manufacturing Has Disappeared 9 Share of ICT Manufacturing Value-Added in Total Manufacturing Sector, 1972-2013 8 7 6 5 4 Share as a Percentage 3 2 1 0 1972 1977 1982 1987 1992 1997 2002 2007 2012
#5 and #6: Computer Prices and the Demise of Moore s Law
Innovations Continue But How Important Are They? Medical and Pharmaceutical Continuous slow but steady progress in advancing life expectancy (but US vs. Canada) Coming collision between physical wellness and mental illness (Alzheimers) Increasing costs of drug development, fewer important new drugs Small Robots and 3-D Printing Robots date back to 1961, continued development is evolutionary not revolutionary Amazon robots are not as smart as you might think 3-D printing useful for development prototypes, not mass production
Innovations Continue But How Important Are They? Big Data and Artificial Intelligence Predominant uses of big data are in marketing, zero-sum game Application to legal searches, radiology reading evolutionary, not revolutionary Next wave of replacement of humans: personal financial services ( Robo-advice ) and insurance agents Driverless Cars and Trucks Truck drivers don t just drive trucks, they unload them and stock the shelves Wholesale trade isn t just gee-whiz Amazon warehouses. Most of it involves delivering bread, coke, and beer
Slower Growth Goes Beyond Innovation The educational plateau -- Increase in educational attainment coming to an end Goldin and Katz 0.35 percent contribution of education Jorgenson -0.30 downward adjustment to education s contribution, i.e., close to zero U.S. steady decline in league tables of high-school completion, four-year college completion Poor preparation for college. International PISA test scores rank out of 34 OECD countries: US #17 in reading, 20 th in science, 27 th in math New issues of college affordability and $1.2 trillion of student debt
The Effect of Education and Capital Deepening
Socioeconomic Changes with Adverse Future Implications Changes 1982 to 2008, children born out of wedlock White high school grads 4 to 34 percent White high school dropouts 21 to 42 percent Black high school grads 48 to 74 percent Black high school dropouts 76 to 96 percent Change 1960-2010, bottom 1/3 of white population For 40-year-old women percent of children living with both biological parents declined from 95 to 34 percent
Socioeconomic Changes with Adverse Future Implications Future consequences of single-parent households More children growing up in poverty Greater likelihood of future high-school dropping out Greater likelihood of criminal activity Additional adverse effects: 1979-2009 percent with prison records white high school dropouts with prison records 4 to 28 percent blacks 15 to 68 percent
Trend in Labor Productivity Growth When Unemployment Rate is Fixed
Potential Output Growth (at a Constant Unemployment Rate)
Productivity Growth in the Short Run: Implications for the Future
Conclusions 70 percent of all TFP growth since 1890 occurred 1920-70 The big impacts on TFP of IR #3 were largely completed by 2005 Innovation continues but is less important in its impact on labor productivity and TFP than in 1996-2004 Educational plateau and socioeconomic decay subtract from future productivity growth Even if productivity growth returns to its 2004-14 average of 1.1, adding 0.4 points for hours yields potential output growth is only 1.5 Implications of slow growth for fiscal solvency, debt-gdp ratio
Comparing Canada and the US: The Output Identity Again Total Output or GDP (Y). Total Hours of Work (H). Total Population (N). Y&H refer to total economy The Productivity Identity Y/N Ξ Y/H * H/N
Ratios, PPP-Adjusted, Canada to US, Y/N, Y/H, and H/N, 1950-2013 Percent 120 115 110 105 100 95 90 Ratio of Canada to U.S., Hours per Person, Output per Person, and Output per Hour, 1950-2013 Output per Person Hours per Person 85 80 75 Output per Hour 70 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Productivity Growth Rates, 5-YR MA, Canada and the US, 1955-2013 4 3.5 3 2.5 Five-Year Moving Average Growth Rate of Output per Hour, Canada and the U.S., 1955-2013 Canada U.S. Percent 2 1.5 1 0.5 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Canada and the EU-15 Output per Hour Relative to the U.S., 1950-2013 100 90 Ratio of Canada and EU15 to U.S., Output per Hour, 1950-2013 Canada 80 70 EU-15 60 50 40 30 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Output per Hour, Ratio of the EU-15 to Canada, 1950-2013 110 Ratio of EU15 to Canada, Output per Hour, 1950-2013 100 90 80 70 60 50 40 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Ratios, Canada to US, Y/N, Y/H, and H/N Percent 120 115 110 105 100 95 90 Ratio of Canada to U.S., Hours per Person, Output per Person, and Output per Hour, 1950-2013 Output per Person Hours per Person 85 80 75 Output per Hour 70 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Ratios Canada to U.S., Components of H/N, 1976-2013 110 Ratio of Canada to U.S., Hours per Employee, LFPR, and Employment Rate, 1976-2013 105 Percent 100 LFPR 95 Hours per Employee Employment Rate 90 1976 1981 1986 1991 1996 2001 2006 2011
Five Dimensions of Superiority of Canada to the U.S. A Labor Market That Has Escaped a Precipitous Decline in Labor-Force Participation Medical Care as a Right of Citizenship A University System without Exorbitant Tuition or Mountains of Student Debt An Immigration System Based on Skills A Well-Regulated and Stable Financial System